Cronos Group Inc. 10-K

ITEM 9A. CONTROLS AND PROCEDURES. (a) Evaluation of Disclosure Controls and Procedures. The Company’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, performed an evaluation of the disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”), as of December 31, 2022. Based on that evaluation, management has concluded that, as of December 31, 2022, due to the existence of a material weakness in the Company’s internal control over financial reporting described below, the disclosure controls and procedures were not effective to provide reasonable assurance that the information required to be disclosed by us in reports we file or submit under the Exchange Act were recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act, is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. (b) Management’s Report on Internal Control Over Financial Reporting The Company’s management is responsible for establishing and maintaining internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based upon criteria established in Internal Control – Integrated Framework (2013) by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our management concluded that our internal control over financial reporting was not effective as of December 31, 2022 because of the material weakness described below. We did not design and maintain effective controls over Information Technology General Controls (“ITGC”), pertaining to user access management and the provisioning and monitoring of user access, including privileged access. We believe this weakness to be the result of ineffective monitoring of security administrator activities, insufficient retention of documentation to support access requests and lack of training on the importance of ITGC. This material weakness did not impact any information derived from information systems and did not result in any identified misstatements to our financial statements. Our independent registered public accounting firm, KPMG LLP, who audited the consolidated financial statements included in this Annual Report, issued an adverse opinion on the effectiveness of the Company’s internal control over financial reporting. 123 (c) Changes in Internal Controls over Financial Reporting Other than the material weakness identified above and measures described below to remediate the material weaknesses previously identified, there were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act), that occurred during the fourth quarter of the year ended December 31, 2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Remediation of Previously Reported Material Weaknesses The Company has implemented various initiatives to address the previously reported material weaknesses in internal control over financial reporting. During the fourth quarter of 2022 , the Company successfully completed the testing necessary to conclude that the material weaknesses have been remediated. Some of our key remedial initiatives included: Material Weakness Control, Control Enhancement or Mitigant Implementation Status Management Testing Status Remediation Status Control Environment • The Company’s Chief Executive Officer and Chief Financial Officer have reinforced and will continue to reinforce on an ongoing basis the importance of adherence to the Company’s policies, procedures and standards of conduct, including identifying misconduct and raising and communicating concerns; Completed Tested Remediated • All accounting personnel that engaged in unprofessional conduct were terminated or resigned from the Company and were replaced with qualified personnel; Completed Tested Remediated • We have enhanced our existing sub-certification process to include additional certifications regarding certain complex accounting topics and to include additional employees to increase accountability amongst Company personnel; Completed Tested Remediated • We have expanded our compensation claw back provisions to incorporate all personnel who are subject to our enhanced sub-certification process; Completed Tested Remediated • We have implemented organizational enhancements including (i) evaluation of the sufficiency, experience and training of personnel within our accounting function and (ii) the hiring of accounting personnel with appropriate knowledge and experience in U.S. GAAP; Completed Tested Remediated • We have implemented a training program for accounting and finance personnel to enhance their knowledge of U.S. GAAP outlined in our accounting policies, which are used in the preparation of the Company’s consolidated financial statements; and Completed Tested Remediated Asset Impairment Testing • We have evaluated and will continue to regularly evaluate our policies and procedures relating to certain complex accounting topics and have implemented improvements in those policies and procedures. Completed Tested Remediated As a result of the settlements with the SEC and the OSC related to the Restatements, the Company has retained a consultant to review and make recommendations with respect to certain of the Company’s internal controls and internal control over financial reporting. That review is ongoing and it is possible that review results in the identification of other material weaknesses or other control deficiencies that require material changes to the Company’s internal control over financial reporting. For additional information of this risk, see Item 1A “ Risk Factors – Risks Relating to Our Growth Strategy – We have had two restatements and seven material weaknesses in our internal control over financial reporting over the last four years, and one material weakness remains unremediated at December 31, 2022. We had a material weakness in our control environment, and in 2021 and 2022, we experienced significant turnover, both voluntary and involuntary, in our accounting and financial reporting functions. If we are unable to remediate our existing material weakness and create an appropriate control environment, our business, results of operations, financial condition, cash flows and reputation will be adversely affected. ” 124 Remediation Plan and Status Related to Material Weakness Identified in the Current Year As discussed above, we have identified a material weakness related to ITGCs in user access management and the provisioning and monitoring of privileged access. As of the filing date, the Company is in the process of implementing various initiatives intended to address the identified material weakness. In this regard, some of our key remedial initiatives include: Material Weakness Control, Control Enhancement or Mitigant Implementation Status Management Testing Status Remediation Status ITGCs • Train security administrators on access provisioning and approval protocols. In Planning Stage Not Tested Not Remediated • Align approval requirements for all privileged access for consistency and appropriate visibility within the IT function. In Planning Stage Not Tested Not Remediated • Implement a process to identify instances where privileged access roles or profiles are assigned and, when identified, review activities performed during the period of assigned privileged access. In Planning Stage Not Tested Not Remediated • Implement a periodic control to compare each user’s system access to their responsibilities. In Planning Stage Not Tested Not Remediated • Implement an oversight control over security administrator actions. In Planning Stage Not Tested Not Remediated ITEM 9B. OTHER INFORMATION. None. ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS. Not applicable. 125 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required under this Item is incorporated herein by reference to our definitive proxy statement or to an amendment to this Annual Report on Form 10-K to be filed with the SEC no later than 120 days after the close of our fiscal year ended December 31, 2022. ITEM 11. EXECUTIVE COMPENSATION The information required under this Item is incorporated herein by reference to our definitive proxy statement or to an amendment to this Annual Report on Form 10-K to be filed with the SEC no later than 120 days after the close of our fiscal year ended December 31, 2022. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required under this Item is incorporated herein by reference to our definitive proxy statement or to an amendment to this Annual Report on Form 10-K to be filed with the SEC no later than 120 days after the close of our fiscal year ended December 31, 2022 . ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. The information required under this Item is incorporated herein by reference to our definitive proxy statement or to an amendment to this Annual Report on Form 10-K to be filed with the SEC no later than 120 days after the close of our fiscal year ended December 31, 2022. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. The information required under this Item is incorporated herein by reference to our definitive proxy statement or to an amendment to this Annual Report on Form 10-K to be filed with the SEC no later than 120 days after the close of our fiscal year ended December 31, 2022. 126 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES. The following documents are filed as part of this Annual Report on Form 10-K, or incorporated herein by reference: (a)(1) Financial Statements . The following financial statements of Cronos Group Inc. are filed as part of this Annual Report on Form 10-K on the pages indicated. CRONOS GROUP INC. AND SUBSIDIARIES Page No. Reports of Independent Registered Public Accounting Firm 74 Consolidated Balance Sheets as of December 31, 2022 and 2021 77 Consolidated Statements of Net Income (Loss) and Comprehensive Income (Loss) for the years ended December 31, 2022, 2021, and 2020 78 Consolidated Statements of Changes in Shareholders’ (Deficit) Equity for the years ended December 31, 2022, 2021, and 2020 79 Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021, and 2020 80 Notes to Consolidated Financial Statements 82 (a)(2) Financial Statement Schedules . Schedules are omitted because the required information is inapplicable, not material, or the information is presented in the consolidated financial statements or related notes. (a)(3) Exhibits . The exhibits listed in the Exhibit Index immediately below are filed as part of this Annual Report on Form 10-K or are incorporated by reference herein. Exhibit Number Exhibit Description 2.1 Options Purchase Agreement, dated June 14, 2021, by and between Cronos USA Holdings Inc. and PharmaCann Inc. (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K of Cronos Group Inc. filed June 15, 2021). 2.2 Option, dated June 14, 2021, issued by PharmaCann Inc. to Cronos USA Holdings Inc. (incorporated by reference to Exhibit 2.2 to the Current Report on Form 8-K of Cronos Group Inc. filed June 15, 2021). 3.1 Certificate of Continuance, Notice of Articles and Articles of Cronos Group Inc. (incorporated by reference to Exhibit 4.1 to the Quarterly Report on Form 10-Q of Cronos Group Inc., filed August 6, 2020). 4.1 Form of Cronos Group Inc. Common Share certificate (incorporated by reference to the corresponding exhibit to the Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020). 4.2 Description of Capital Stock of Cronos Group Inc. (incorporated by reference to Exhibit 4.2 to the Annual Report on Form 10-K of Cronos Group I nc., filed March 1, 2022) 10.1 Subscription Agreement, dated as of December 7, 2018, by and among Cronos Group Inc., Altria Summit LLC, and, solely for the purposes specified therein, Altria Group, Inc. (incorporated by reference to Exhibit 99.1 to the Company’s Current Report of Foreign Private Issuer, filed December 10, 2018). 10.2 Investor Rights Agreement, dated as of March 8, 2019, by and between Cronos Group Inc. and Altria Group, Inc. (incorporated by reference to Exhibit 99.1 to the Company’s Current Report of Foreign Private Issuer, filed March 15, 2019). 10.3 Collaboration and License Agreement, dated as of September 1, 2018, by and between Cronos Group Inc. and Ginkgo Bioworks, Inc. (incorporated by reference to Exhibit 99.3 to the Company’s Current Report of Foreign Private Issuer, filed September 4, 2018). 10.4 First Amendment to Collaboration and License Agreement, dated as of May 9, 2019 (incorporated by reference to the corresponding exhibit to the Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020). 10.5 Amended and Restated Collaboration and License Agreement, dated as of June 3, 2021, by and between Ginkgo Bioworks, Inc. and Cronos Group Inc. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Cronos Group Inc. filed June 4, 2021). 10.6† Cronos Group Inc. 2015 Amended and Restated Stock Option Plan, dated as of May 26, 2015 (incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-8 of Cronos Group Inc., filed July 11, 2018). 10.7† Form of Option Certificate to 2015 Amended and Restated Stock Option Plan (incorporated by reference to Exhibit 10.6 to the Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020). 10.8† First Amendment to the Cronos Group Inc. 2015 Amended and Restated Stock Option Plan, dated as of August 7, 2019 (incorporated by reference to Exhibit 10.7 to the Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020). 127 10.9† Cronos Group Inc. Amended and Restated 2018 Stock Option Plan, dated as of November 11, 2019 (incorporated by reference to Exhibit 10.8 to the Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020). 10.10† Cronos Group Inc. Deferred Shared Unit Plan for Non-Executive Directors, dated as of August 7, 2019 (incorporated by reference to the Exhibit 10.9 to the Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020). 10.11† Employment Agreement, by and between Cronos Group Inc. (Employment Agreement, by and between Cronos Group Inc. (f/k/a PharmaCann Capital Corporation) and Michael Gorenstein, effective as of August 10, 2016 (incorporated by reference to Exhibit 10.10 to the Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020). 10.12† Description of Oral Amendment, effective as of June 2019, to Employment Agreement, by and between Cronos Group Inc. (f/k/a PharmaCann Capital Corporation) and Michael Gorenstein, effective as of August 10, 2016 (incorporated by reference to Exhibit 10.11 to the Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020). 10.13† Cronos Group Inc. Employment Inducement Award Plan #1 (incorporated by reference to Exhibit 10.21 to the Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020). 10.14† Form of Director and Officer Indemnity Agreement (incorporated by reference to Exhibit 10.24 to the Annual Report on Form 10-K of Cronos Group Inc., filed on March 2, 2020). 10.15† Cronos Group Inc. 2020 Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of Cronos Group Inc., filed August 6, 2020). 10.16† Form of Restricted Share Unit Award Agreement to Cronos Group Inc. 2020 Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of Cronos Group Inc., filed August 6, 2020). 10.17† Form of Restricted Share Unit Award Agreement (Israel) to Cronos Group Inc. 2020 Omnibus Equity Incentive Plan (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q of Cronos Group Inc., filed August 6, 2020). 10.18† Executive Employment Agreement, dated as of September 9, 2020, by and among Cronos USA Client Services LLC, Cronos Group Inc. and Kurt Schmidt (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Cronos Group Inc., filed September 9, 2020). 10.19† Amended and Restated Employment Agreement, dated as of September 9, 2020, by and among Cronos USA Client Services LLC, Cronos Group Inc., and Michael Gorenstein (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of Cronos Group Inc., filed September 9, 2020). 10.20† Amended and Restated Executive Employment Agreement, dated as of June 3, 2021, by and among Cronos USA Client Services LLC, Cronos Group Inc. and Todd Abraham (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of Cronos Group Inc., filed August 6, 2021). 10.21† Executive Employment Agreement, dated as of August 6, 2021, between Cronos USA, Cronos Group and Robert Madore (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q of Cronos Group Inc., filed August 6, 2021). 10.22† Executive Employment Agreement, dated as of January 10, 2022, by and among Cronos USA Client Services LLC, Cronos Group Inc., Hortican Inc. and John Griese (incorporated by reference to Exhibit 10.27 to the Annual Report on Form 10-K of Cronos Group Inc., filed on March 1, 2022 ) . 10.23† Letter Agreement, dated as of February 17, 2022, by and among Cronos USA Client Services LLC, Cronos Group Inc., and Anna Shlimak (incorporated by reference to Exhibit 10.2 8 to the Annual Report on Form 10-K of Cronos Group Inc., filed on March 1, 2022 ) . 10.24† Amended and Restated Employment Agreement, dated as of March 21, 2022, between Cronos USA Client Services LLC, Cronos Group Inc. and Michael Gorenstein (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Cronos Group Inc., filed on March 21, 2022). 10.25† Letter Agreement, dated as of March 21, 2022, between Cronos USA Client Services LLC, Cronos Group Inc. and Kurt Schmidt (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of Cronos Group Inc., filed on March 21, 2022). 10.26† Executive Employment Agreement, dated as of August 16, 2020, among Cronos Israel G.S. Cultivation Ltd., Cronos Group Inc. and Ran Gorelik (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q of Cronos Group Inc., filed on May 10, 2022). 10.27† Letter Agreement by and among Jeffrey Jacobson and Hortican Inc., dated November 7, 2022 (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of Cronos Group Inc., filed on November 7, 2022). 10.28† Letter Agreement by and among John Griese, Cronos USA Client Services LLC, and Hortican Inc., dated November 7, 2022 (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of Cronos Group Inc., filed on November 7, 2022) 10.29† James Holm Employment Agreement, dated November 14, 2022, among Cronos USA, the Company and Mr. Holm (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Cronos Group Inc., filed on November 14, 2022). 128 10.30 Altria’s notice of abandonment, dated December 16, 2022 (incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K of Cronos Group Inc., filed on December 19, 2022). 10.31† Letter Agreement by and between Robert Madore and Cronos USA Client Services LLC, dated February 8, 2023 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K/A of Cronos Group Inc., filed on February 13, 2023) 10.32†* Letter Agreement by and between Anna Shlimak and Cronos USA Client Services LLC, dated February 21 , 2023. 14.1 Cronos Group Inc. Code of Business Conduct and Ethics (incorporated by reference to Exhibit 14.1 to the Annual Report on Form 10-K of Cronos Group Inc., filed on March 1, 2022). 21.1* List of Subsidiaries of Cronos Group Inc. 23.1* Consent of KPMG LLP, Independent Registered Public Accounting Firm. 24.1* Power of Attorney (included on signature page hereto). 31.1* Certification of the Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Certification of the Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1** Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2** Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS* XBRL Instance Document 101.SCH* XBRL Taxonomy Extension Schema Document. 101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF* XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB* XBRL Taxonomy Extension Label Linkbase Document. 101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document. † Management contract or compensatory plan or arrangement. * Filed herewith. ** Furnished herewith and not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. 129 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CRONOS GROUP INC. By: /s/ Michael Gorenstein Michael Gorenstein Chairman, President and Chief Executive Officer Power of Attorney KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Michael Gorenstein and James Holm, severally, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Name Title Date /s/ Michael Gorenstein Chairman, President and Chief Executive Officer (Principal Executive Officer) February 28, 2023 Michael Gorenstein /s/ James Holm Chief Financial Officer (Principal Financial Officer) February 28, 2023 James Holm /s/ Carlos Cortez Vice President, Controller (Principal Accounting Officer) February 28, 2023 Carlos Cortez /s/ Kendrick Ashton, Jr. Director February 28, 2023 Kendrick Ashton, Jr. /s/ Heather Newman Director February 28, 2023 Heather Newman /s/ James Rudyk Director February 28, 2023 James Rudyk /s/ Jody Begley Director February 28, 2023 Jody Begley /s/ Jason Adler Director February 28, 2023 Jason Adler /s/ Murray Garnick Director February 28, 2023 Murray Garnick 130